As Registered Financial Advisers we will continue to provide services for institutions, trusts and individuals that meet the requirements of a Wholesale Client and also for those individuals who opt out of registering as a Retail Client.  To read more about the differences between Wholesale and Retail Clients, please click here.

We are happy to comply with the following conditions the Financial Markets Authority (FMA) have established for Registered Financial Advisers from 1 July 2011:

• act with care, diligence and skill (section 33 of the Financial Advisers Act 2008)
• not engage in misleading or deceptive conduct (section 34)
• ensure advertisements are not misleading, deceptive or confusing (section 35)
• comply with disclosure obligations when providing personalised services to retail clients
• RFAs need to be registered on the Financial Service Providers Register.

Logic Fund Management’s Financial Service Provider registration number is FSP5321 and Greg Marshall’s is FSP123504.

Resolving a complaint or problem:

We aim to provide you with the utmost financial service and support at all times.  If a situation arises where you encounter a problem or have a complaint, please contact our account manager at Logic Fund Management.  If you are not comfortable doing so, you have two other options available.  You can click the following link to the Financial Markets Authority website and lodge a complaint or gather more information here.  You can also use Logic Fund Management’s dispute service,  the Financial Dispute Resolution Scheme, which is an approved scheme under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.  To request a review of your situation or to lodge a complaint please use the following contact information:

Financial Dispute Resolution Scheme

Membership number: FM0293

Website: www.fdr.org.nz

Telephone number: 0508 337 337

2010 has proved to be an eventful year for Logic Fund Management with the unfolding Credit Sails process, a continued and successful concentration within the New Zealand bond market, and a wealth of new clients joining the Logic program.  As we transition into the new year we will continue to focus on the bond market and plan to execute our recent corporate underwrite, IEF, within the summer months.

Early in this last quarter, the fluctuations in the markets, especially Australia, made it next to impossible to invest on sound data as the market would swing high or low on head-line news.  In September we chose to sell out of a couple of long term holdings such as Power One and Norfolk Group.  We have been involved with Power One since the early 1992, and on this recent run were able to nearly triple our original investment from May through September.  We sold given our view that budget problems will result in the removal of government subsidies on European renewable energy, and that the US dollar will devalue.  Norfolk Group was tremendously successful with a fivefold increase, but due to the unease we felt in the manner in which Norfolk shares traded, we reduced exposure and emphasized investment in currencies and markets that may prosper during the new fiscal austerity and US dollar debasement.

Our continued focus on the Canadian oil sands has begun to pay off as the Canadian Government has just signed off on the pipeline from the Arctic and in our view it is only a matter of time before it continues to the US counterparts.  The US mid-term elections have swung votes focused on the climate and energy leaving these issues in the hands of the corporations who have chosen to pump additional investments into the Canadian oil sands, highlighting their long-term value (fund positions Ivanhoe Energy and Athabasca Oil Sands).

Speaking of US politics and economics, a number of important trends have emerged and solidified as the markets prepare to close out 2010.  First, the headlong rush into bond funds has stopped and as if someone rung a bell to mark the trend change, the US government bond market recently had the worst two days in many years as both the 10 and 30 year bonds rose in yield and fell in price.  Second, precious metal prices have weakened as buyers view the likelihood of another major economic disaster has decreased. Third, industrial commodities and oil have climbed higher as global growth rates have been upgraded and evermore commodity exchange traded funds hover up commodities.

Possibly the most significant factor contributing to these events has been the move to the centre by president Obama resulting in a tax cut/unemployment benefit deal recently passed by the US Government.  The analysis we subscribe to views this deal as a two year, one trillion dollar stimulus package which will hopefully give the US economy escape velocity from its unemployment state into more vibrant growth and job creation.

What does this all mean for Logic?  In our view the Australian dollar and economy will be strongly driven by commodities and the bonds to equities switch will be broadly supportive of Australian equities.  But the most significant is the revival of commercial real estate investment after the multi-year collapse.  In our view the general destruction of value in the listed commercial property sector has ground to a halt (except for NZ) and listed real estate equities provide perhaps the most undervalued sector of the markets.

Hence Logic’s significant exposure to IEF, a listed Australian real estate trust that provides a fabulous exposure to Australian dollar commercial property at a grotesquely large discount to net asset value.  A number of short-term catalysts such as the internalization of the management contract and the sale of non-core assets will unlock this hidden value, allowing IEF to trade up to its anticipated market value.  We are currently working as quickly as possible to help the management of IEF to restructure the business and to resolve the outstanding issues mentioned above.

Moving into 2011 we will have a strong focus on this trade in Australia as well as PGC in New Zealand as they have turned around flawlessly.  We will also be delving deeper into the New Zealand bond market after witnessing the success of the SCF trades as well as the implementation of the Logic Bond Portfolio.  We were able to generate healthy returns for most clients through these minimal risk trades in spite of the markets move in the other direction.  Although we cannot disclose details at the moment, we will be announcing our new fixed interest fund, Credit Logic, in the new year.  This will be open to both current and new investors.  Please give us a ring if you are interested in hearing more details.

We wish you the best from Logic Fund Management and a happy new year.

Yours truly,

Greg Marshall

Disclaimer: The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness. All opinions reflect our judgment on the date of this report and are subject to change without notice. The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment. Past performance is not a reliable guide to future performance. Disclosure statements available.

Commerce Commission probe into ‘Credit Sails’ bond sales

The Commerce Commission has confirmed it’s investigating the Forsyth Barr managed, NZX listed and Credit Agricole organised “Credit Sails” bonds which raised NZ$91.5 million from the public in 2006 before crashing in value spectacularly during the global credit crisis.

A Commerce Commission spokeswoman said the consumer watchdog was conducting an investigation under the Fair Trading Act into “alleged misleading representations made as to the characteristics and risk” of the Credit Sails product.

“Forsyth Barr was the lead manager and underwriter of Credit Sails,” she added. “As the investigation is underway the Commission will make no further comment.”

A Securities Commission spokesman declined to comment on whether it was also involved in the investigation.

Neil Paviour-Smith, Forsyth Barr’s managing director, said his understanding was that the Commerce Commission was looking into various products issued in recent years that investors had referred to the Commission along with “various allegations.”

“No doubt the Commission will be dealing with these as it would any complaint or any allegations forwarded to them. And no doubt that with any failed security there will be allegations that there were misrepresentations of other wrongdoings,” said Paviour-Smith.

The Credit Sails bonds were issued by the Cayman Islands-registered Credit Sail Ltd and directors provided by another Cayman Islands company, Maples Finance.

Among the 1566 Credit Sails investors, enticed by the prospect of 8.5 per cent annual interest over the six and a half year life time of the notes and an AA credit rating from Standard & Poor’s (S&P), were several charities and community groups including the Hospice Southland Charitable Trust, the New Zealand Methodist Trust Association, the Youth Development Endowment Trust, the Roman Catholic Bishop of the Diocese of Dunedin, the Congregational Christian Church in Samoa and Dunedin Orphan’s Club.

Investors’ had to stump up a minimum of NZ$5,000.

Greg Wright, executive officer of the Methodist Trust Association which is facing a six figure loss on its Credit Sails investment, told interest.co.nz that he welcomed the Commerce Commission investigation.

A representative from the consumer watchdog had already attempted to contact him and he was interested to see what questions the Commerce Commission had.

The Methodist Trust Association would “obviously” welcome any recovery on its Credit Sails investment.

“We don’t make our investments in the expectation of not getting our capital back,” Wright said.

The proceeds raised in the Credit Sails, or Credit Saleable Index Linked Securities, offer were invested into notes known as the Momentum CDO (collateralised debt obligations) Europe Limited Series 2006-16.

Credit Sail also entered into a total return swap with Credit Agricole Corporate and Investment Bank, formerly Calyon, so it could – in theory – pass the return from any capital gain at maturity and interest, to Credit Sail.

According to Credit Sail’s half-year report, French bank Credit Agricole acted as arranger of both the Credit Sails and Momentum notes issues, is counterparty to the swap, and calculation agent.

In an NZX announcement in May last year, Credit Sail’s then sole director Giles Le Sueur informed investors’ they’d effectively lost the shirts off their backs.

“We wish to inform you that the Calculation Agent for the Momentum Collateral Securities has sent a notice to Credit Sail Limited advising that, as of May 11, 2009, the Aggregate Loss Amount in the Reference Portfolio is equal NZ$560,611,787.32 following the occurrence of several credit events,” Le Sueur wrote.

These “credit events” included the demise of several companies the Credit Sails portfolio was exposed to including Lehman Brothers and Washington Mutual, Icelandic banks Landsbanki Islands, Glitnir banki and Kaupthing banki, plus the bankruptcy of US phone directory group Idearc.

“As the Aggregate Loss Amount exceeds the Maximum Loss Amount, the nominal amount of the Momentum Collateral Securities will be reduced to zero on the Scheduled Maturity Date,” Le Sueur added.

“The holders of Credit Sails will not receive their principal back and the Credit Sails will be redeemed at zero, plus the holder’s pro rata share of the residual monies, equal to NZ$1,067,239.14, plus interest which was produced upon the unwind and termination of the Credit Strategy on November 17, 2008.

For each note with a denomination of NZ$1,000.00, the pro rata share of the residual monies shall be NZ$11.66, plus interest, due on the Scheduled Maturity Date.”

Wright said the Methodist Trust Association bought its Credit Sails notes through Craigs Investment Partners subsidiary Greenslades. He feels S&P has much to answer for.

“In the specifics of Credit Sails you really need to say that how can it be that something that is rated at that level is so susceptible to a demolition?”

The Commerce Commission’s Credit Sails investigation comes after it secured a NZ$45 million payout to thousands of investors in the ING Diversified Yield Fund and the ING Regular Income Fund which were marketed by ING and the ANZ. The settlement, reached in June, followed an investigation into alleged breaches of the Fair Trading Act.

Wright said there was a similarity between Credit Sails and the ING funds in the sense both were sold as being robust fixed interest products.

“Neither proved to be robust fixed interest products and at an AA rating you’d expect it to be an extremely robust fixed interest product,” said Wright.

Greg Marshall, of Wanaka-based Logic Fund Management, says his firm is representing about 850 Credit Sails investors. Although Logic wasn’t involved in the marketing or selling of Credit Sails, Marshall says his number one objective is to “get the grandmas their money back.”

He knew of an Auckland man, who after making NZ$1 million from selling a property, invested NZ$500,000 in Credit Sails, NZ$250,000 into South Canterbury Finance preference shares and NZ$250,000 in Strategic Finance preference shares and lost the lot.

Marshall says he believes Credit Sails was mis-sold, failed to properly disclose the buyback of some of the notes, and securities laws were potentially “busted” in the way the product was built and sold.

Logic’s research suggests about NZ$19 million worth of Credit Sails were exchanged via the NZX in 2007 at 93.6 cents in the dollar, although no filing was made to the NZX and nor did Credit Sail disclose this in its annual report.

The latest Credit Sail monthly report records a “nominal amount” of NZ$66.54 million worth of Credit Sails notes, excluding those held by Credit Agricole.

Wright said questions needed to be asked about how investors were treated on a equitable basis given some apparently had the opportunity to sell and others didn’t.

Meanwhile, Paviour-Smith said Forsyth Barr’s role as lead manager and underwriter of the Credit Sails issue were “completely separate” to the involvement of the firm’s advisers in discussing the securities with their clients, and how they represented the security offering to their clients. This was the same as how other brokers discussed and marketed Credit Sails.

“That means that if broker XYZ misrepresented Credit Sails to a client it does not mean Forsyth Barr is at fault just because we were the lead manager,” Paviour-Smith added.

“As regards the offer documents etc these were all the responsibility of the issuer/promoters IE Calyon Bank.”

Paviour-Smith said in an interview last year that Forsyth Barr’s involvement with Credit Sails came via the Hong Kong branch of Calyon. Other New Zealand firms involved were auditor BDO Spicers and trustee New Zealand Permanent Trustees Ltd, a Public Trust subsidiary.

“Essential to us was the credit rating,” says Paviour-Smith.

The rating, from Standard & Poor’s, was “AA” meaning the credit rating agency viewed Credit Sail as having “very strong” capacity to meet financial commitments.

However, S&P’s rating was only on the probability of investors getting their principal investment back. It did not cover the likelihood of them receiving interest payments.

As to whether Credit Sail was the type of investment that should have been promoted to community groups and retail investors, Paviour-Smith says it’s impossible to comment on individual investor’s decisions.

“But generally speaking the AA credit rating was the primary reason I think a lot of people invested in it.”

This meant Credit Sail was one of the highest-rated debt securities in the market.

“That’s a principal driver of why people were willing to invest in it and why we were happy to be involved with it,” says Paviour-Smith.

Clearly it’s “disappointing” it hasn’t come to fruition.

“But I guess there’s always an element of risk.”

S&P now rates the Credit Sails principal CC, meaning it’s “currently highly vulnerable”. S&P says investors’ should keep in mind that credit ratings aren’t advice or an indication of investment merit. Instead they are “opinions on aspects of an investment decision – creditworthiness and likelihood of default.”

Leading up to the Vital Healthcare Property Trust (VHP) rights issue, Logic Fund Management issued a flash note recommending stock holders to take advantage of the forced selling on the market in late November.   The notes were trading at NZ $1.29 which was more than 20.00% above the rights issue price at $1.05.  Now that the trading has settled and the stock price reduced we update our position from sell to hold.

Current Situation

As was expected, the share price fell to match the rights issue price of $1.05.   Due to this sell off, the value of the stock has changed and we now recommend holding onto VHP as it is now trading at a value enhanced price.

Logic Analysis:  Hold

In our analysis the current Cash Distribution per Unit (CDPU) is approximately 8.3 cents increasing the yield to approximately 11.50%.  With the stock now stabilising at 1.05 we see no reason to continue to sell, as VHP is now priced in line with the other listed property trusts.  The rights issue closes on December 13.

VHP is currently less exposed to risk due to the success of the recent rights issue, but at the same time, investors will not reap the long term benefits of the rights issue immediately.   Keep abreast of company news as this event settles out.

Disclaimer:
The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness.  All opinions reflect our judgment on the date of this report and are subject to change without notice.  The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment.  Past performance is not a reliable guide to future performance.  Disclosure statements available on request.

VHP Rights Issue

Vital Healthcare Property Trust (VHP) recently released their prospectus for the rights issue to acquire a twelve asset portfolio from Australia’s Essential Health Care Trust (EHCT).  VHP is attempting to raise NZ $150.9m through a fully under-written one-for-one rights issue at $1.05 per unit.  This capital raising is dependent on unit holder participation and all holders have the option to increase or decrease position size.

Current Situation

These units are currently trading at NZ $1.29, which is more than 20.00% above the rights issue price at $1.05.  The rights begin trading on Monday, 22 November with the record date for entitlement being the 24 November.

Logic Analysis:   SELL

In our opinion, the asset acquisition by VHP and the rights offering provide an opportunity to sell at an attractive price.  We recommend taking advantage of the buying now, and completely avoiding this rights issue for the following reasons:

• VHP is purchasing the Australian twelve asset portfolio for full retail price – full net asset value compared to a current average market discount of 6%. We also note that a number of Australian tenants have the option to buy their property, which places a cap on the potential for upside growth for this trade.

• Low yield in comparison to other NZ based Real Estate Investment Trusts (REIT). For example, The Goodman Trust (GMT) offers up to 2% greater yield than this and is a safer option in our mind.

• The issue as a whole has received similar criticism from other market commentators  and appears as if there is a general lack of interest in the NZ Market.

• The issue is  solely lead managed by Forsyth Barr and their track record speaks for itself: (South Canterbury Preference Shares, Credit Sails, Strategic Finance, Hanover, Feltex).

Recommendation:

Sell them if you own them – ideally as soon as possible.

Please click here to download this document as a PDF.

Disclaimer:
The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness.  All opinions reflect our judgment on the date of this report and are subject to change without notice.  The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment.  Past performance is not a reliable guide to future performance.  Disclosure statements available on request.

Where and how to invest now

Click here to download this as a PDF

Immediately following the SCF receivership, Logic issued a flash note recommending the bonds in the chart below and as we predicted, the yields have fallen and the price has risen.  As the last of the SCF funds are deployed, we have updated our analysis of what is in our opinion, the top high yielding fixed interest securities currently available in the New Zealand market.  We have provided details comparing the bonds from the 31 August, 2010 to present as well as the Logic Active Bond Portfolio in comparison to NZ Benchmarks.

Recommendations:

We remain positive on all our recommended bond positions however given the recent reductions in yield, we would only look to add to our positions on market weakness.

General Market Comment:

Given the extremely large amount of money ($1.3b) currently being deployed in the small NZ fixed income market, it is likely that yields will remain low as investors look for additional yield than that offered by bank term deposits.

Despite all the international news of the US government printing massive amounts of money, we believe market expectations for this are overblown and the global recovery, whilst subdued in the developed world, continues at pace.

Now is not the time to chase bond yields lower and we are avoiding most of the recent bond issues, especially those of five year plus terms.  We expect interest rates will be higher in two years time causing any hasty low yielding purchases today to be regrettable.

Disclaimer:
The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness.  All opinions reflect our judgment on the date of this report and are subject to change without notice.  The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment.  Past performance is not a reliable guide to future performance.  Disclosure statements available on request.

]]> http://www.logicfunds.com/scf-receivership-stage-2-where-and-how-to-invest-now/feed/ 0 http://www.logicfunds.com/logic-participates-in-australian-real-estate-recapitalisation/ http://www.logicfunds.com/logic-participates-in-australian-real-estate-recapitalisation/#comments Fri, 15 Oct 2010 02:12:00 +0000 Greg http://www.logicfunds.com/?p=592 Logic participates in significant Australian Real Estate recapitalization

Please click here to download the complete PDF of this document.

Logic was one of the underwriters in the ING Real Estate Entertainment Fund (IEF.AX) recapitalization and purchased stock at $.09 AUD in August, 2010.

IEF is an Australian Real Estate Trust concentrated in entertainment clubs, bars and Australia’s largest pub group Panthers Entertainment which is comprised of 15 separate sites throughout New South Wales.  As noted in the chart, the Australian real estate market as a whole has moved down since late 2008 and IEF has followed suit.  After a two year calm, the Australian Real Estate Trust market is currently facing numerous mergers and acquisitions, and in particular, ING has stated that they are restructuring funds and it is expected IEF management agreement will be internalised.  What separates IEF from the rest of the market is its heavy discount to NAV, its share holder value-enhancing restructuring and significant hidden assets.

Logic Fund Management visited Sydney in October, 2010 and had the opportunity to investigate these assets.  In our analysis, the freehold pubs and clubs are under valued on an income yield basis alone.  The freeholds could also provide significant additional value by partnering with tenants to unlock unvalued real estate.  The IEF portfolio as a whole includes assets which are likely to be valued materially greater than book value once the real estate opportunities in Sydney and surrounding areas are taken into account.

IEF vs Standard Australian Property Trust:

Source:  Big Charts, October 14, 2010

Key Investment Features:

• Significant discount to NAV in comparison to other Australian Real Estate Trusts.
• Significant undervalued assets and undeveloped land holdings.
• Shareholder value positive restructuring.

o        Internalized management contract.

o        Improved debt profile.

o        Likely resumption of dividends.  We estimate this could be an approximate yield of 15 % vs market average of 6 %.

• ING Real Estate Trusts are in play as ING withdraws from the market.   Analysts are predicting finalization of a deal soon.

Disclaimer:
The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness.  All opinions reflect our judgment on the date of this report and are subject to change without notice.  The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment.  Past performance is not a reliable guide to future performance.  Disclosure statements available on request.

15 September, 2010

The recent Basel III global capital requirements have created an opportunity to invest in an endangered species of high yielding hybrid debt before it goes extinct.  Coupled with the recent Christchurch earthquake and inevitable deployment of South Canterbury Finance funds, we feel that the following bonds may be the fixed income trades of the year:

NZ Fixed Income	YTM/Reset	Maturity Date	Reset Date
ANBHA	8.6%	Perpetual	April 2013 & 2018
BISHA	8.6%	Perpetual	March 2013 & 2018
CASHA	16%	Perpetual	December 2012
WKS 010	18%	2 yrs	June 2012

Basel III global capital changes: Most of the perpetual shares have been classified as hybrid debt, meaning they are not quite equity and not quite debt, but have always been considered Tier 1 Equity for the banks issuing them.  The implications of the Basel III global capital requirements have created a situation which will no longer allow banks to classify perpetual/hybrid debt with calls and step up features as Tier 1 Capital Equity.

The new rules will alter the underlying structure of bank equity and we feel banks will stop producing hybrid debt, therefore placing a cap on these instruments.  As pure debt it will be extremely expensive to have out on issue and banks will use the first opportunity to buy the hybrids back.  We predict this redemption to be the closest reset date for each perpetual share, which for most is between 2012 and 2013.

The Christchurch Crisis: We believe the New Zealand government will issue short term treasury bills with less than 12 month duration to help fund the capital costs for rebuilding the city.  One of the impacts of this will be a change in the shape of the yield curve when New Zealand banks switch out of 2-3 year government bonds.  As this occurs, we predict that 2012 and 2013 bonds will fall in price and rise in yield, which will likely result in higher coupon resets for eligible hybrid debt.  Whilst WKS 010 are not hybrid bank debt, they will be positively impacted by the change in the yield curve when reset in 2012.

Logic Recommendation: Buy big bank hybrid debt with 2012-2013 rate resets, step-ups and calls.  Take advantage of the current forced selling in WKS 010.

Disclaimer:

The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness.  All opinions reflect our judgment on the date of this report and are subject to change without notice.  The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment.  Past performance is not a reliable guide to future performance.  Disclosure statements available upon request.

Please click here to download as a PDF

The product, Credit Sails notes, was sold to investors in 2006 with the prospect of 8.5 per cent interest and a capital guarantee.

But after $91.5 million was raised through the offer, the price of the listed notes tanked on the NZX as the financial crisis developed and by late 2008 the notes were worthless.

A former Credit Sails investor, Robert Johnson, told BusinessDay he welcomed the move.

“I think there’s a few aspects of that whole deal that would warrant a review,” he said.

“A number of organisations vouched for it, with credit ratings and so on, but then when it falls over they may have been aware from the beginning there was no practical way for anyone to hold them accountable  they’re too many dollars away.”

Many investors who bought Credit Sails were clients of broker Forsyth Barr, which also earned commission as lead manager and underwriter of the offer.

BusinessDay understands the Commerce Commission has requested a number of documents from Forsyth Barr in relation to its inquiries.

The Commerce Commission said it did not comment on its investigations and Forsyth Barr did not return a call seeking comment.

A spokesman for the product’s trustee, NZ Permanent, said: “We haven’t heard anything [about an inquiry] and as far as we’re aware we haven’t been contacted [by the commission].”

Since Credit Sails collapsed, several concerns have emerged about how the product was structured and marketed.

At its heart, Credit Sails was an insurance deal in which Kiwi investors’ money was used to insure a secret third party against losses in a corporate bond portfolio. However, it appears many investors had no idea their money was being used for insurance.

Fund manager Greg Marshall of Logic Funds in Wanaka has been campaigning for an inquiry into Credit Sails and represents 730 people who had invested about $29m in the product, “so we are very certain what the oral representations made to customers were”.

“It’s all about how the product was sold,” he said.

“It looks to us like there are issues under the Fair Trading Act.”

The deal’s designer was an overseas investment bank called Calyon, a subsidiary of giant French bank Credit Agricole.

While the bond portfolio contained more than 100 blue chip companies, it also contained a handful that collapsed during the crisis.

It was their defaults that triggered the payout of the insurance and the total loss for Credit Sails investors.

Since the portfolio was deliberately designed to remain fixed for the whole six years of the product, nothing could be done to improve it once the weakening position became apparent.

Its overweight exposure to Icelandic banks and a heavily indebted directories business in America accelerated the decline, leading to suspicion of similarities between Credit Sails and Abacus, a synthetic collateralised debt obligation (CDO) brokered by Goldman Sachs and subject of a lawsuit brought against Goldman Sachs by the Securities & Exchange Commission in America.

The SEC complaint alleged Goldmans knew the CDO was designed to fail, leading to huge losses for investors on one side of the deal  and huge gains on the other.

Goldmans settled the lawsuit in July for a record US$550m (NZ$768m) without admitting liability, but accepting its marketing materials were faulty.

In July 2007, a Forsyth Barr adviser warned a client about concerns with Credit Sails “and the quality of the capital guarantee via the CDO,” citing an opportunity to sell the stock in a buyback at about 93c in the dollar.

Stock exchange figures from July 2007 suggest about $10.8m worth of stock was acquired in the buyback by Calyon and a further $9m acquired by December.

BusinessDay understands many investors never learned of the buyback or of Forsyth Barr’s alarm.

Click here to read this article by Tim Hunter on stuff.co.nz

31 August, 2010

The failure of South Canterbury Finance will have very clear investment implications:

1.) Government bond yields will rise.

2.) Current high yielding NZ Debt Securities will decrease in yield as the $1.7bn worth of SCF funds are redeployed in a matter of weeks.

3.) The NZ Share Market will remain weak.

Logic Fund Management has been recommending and currently recommends the following NZ fixed income bonds:

NZ Fixed Income	YTM/Reset	Maturity Date	Reset Date
ANBHA	8%	Perpetual	April 2013 & 2018
BISHA	8.6%	Perpetual	March 2013 & 2018
CASHA	16%	Perpetual	December 2012
WKS 010	15%	2 yrs	NA

We recommend taking advantage of this situation immediately because the opportunity to lock in high yielding, secure fixed interest within New Zealand is evaporating daily.

Please contact Logic Fund Management if you would like any more information or would like assistance taking part in this opportunity.  Disclosure statements are available upon request.

Sincerely,

Greg Marshall

Click here to download a PDF of SCF_Investment_Implications

Disclaimer:

The information and any opinions herein are based upon sources believed reliable, but Logic Fund Management and its directors make no representations as to its accuracy or completeness.  All opinions reflect our judgment on the date of this report and are subject to change without notice.  The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment.  Past performance is not a reliable guide to future performance.